Mortgage Rates Rise Despite Fed Rate Cut, Leaving Homebuyers Confused
Rates Rise Despite Federal Reserve’s Interest Rate Cut
In September, the Federal Reserve lowered its benchmark interest rate for the first time since 2020, giving hope to prospective home buyers that mortgage rates would follow suit. However, instead of declining, home loan costs marched higher.
Confusion Among Homebuyers
"People are confused," said Jeff Lazerson, president of Mortgage Grader in Laguna Niguel. "They are saying ‘What’s going on?’"
Why Mortgage Rates Rose Despite the Fed’s Cut
The fact that mortgage rates have gone up despite the cut underscores that while the Federal Reserve influences mortgage rates, it does not set them. Instead, rates are determined by what institutional investors who purchase bundles of mortgages are willing to pay for them and a variety of factors influence those investors.
Factors Affecting Mortgage Rates
One is the benchmark rate the Fed cut in September, which sets a floor on borrowing costs throughout the economy. Another is expectations for inflation. That’s because when purchasing 30-year mortgages, investors don’t want to see the value of their investment eaten away as the years march on. Additionally, economic data has come in stronger than expected, convincing investors that inflation will stay higher for longer and the Fed won’t be able to cut rates as much as they otherwise could have.
Political Factors at Play
Chen Zhao, an economist with real estate brokerage Redfin, said it appears investors increasingly believe former President Trump will best Vice President Kamala Harris and retake the White House. According to a recent survey from the Wall Street Journal, most economists predict inflation and interest rates would be higher under policies proposed by Trump, who among other measures has called for sweeping tariffs on imported goods.
The Impact on Homebuyers
As rates rise, home buyers feel the pinch. Lazerson said he’s seen business slow to a "trickle" after an initial burst when rates dropped around the Fed announcement. The reason is simple math. When rates hit their recent bottom of 6.08% in September, the monthly principal and interest payment on a $800,000 house would have been $3,870. It’s now $4,138.
What to Expect Next
Zhao said what happens with rates next depends on a variety of factors, including who wins the election and what policies they actually enact. If there isn’t a policy shift, she would expect mortgage rates to come down next year because inflation is easing. However, economists say borrowers shouldn’t expect pandemic-era mortgage rates of 3% and below.
Conclusion
The recent rise in mortgage rates has left many homebuyers confused, and it’s unclear what the future holds. However, one thing is certain: the impact of political and economic factors on mortgage rates will continue to be a major influence on the housing market.
Frequently Asked Questions
Q: Why did mortgage rates rise despite the Fed’s rate cut?
A: Mortgage rates are determined by institutional investors who purchase bundles of mortgages and are influenced by factors such as the benchmark rate the Fed cut in September, expectations for inflation, and economic data.
Q: What are the factors that influence mortgage rates?
A: The benchmark rate the Fed cut in September, expectations for inflation, and economic data.
Q: What is the impact of political factors on mortgage rates?
A: Political factors, such as who wins the election and what policies they enact, can influence mortgage rates.
Q: What should homebuyers expect next?
A: The future of mortgage rates depends on a variety of factors, including who wins the election and what policies they enact.
